God save the borrowers!

By Merril Diniz

When it comes to the stock market it’s obvious that Dr VM Shah favours fidelity over flings. The 44-year old paediatrician’s love affair with equity began in 2003 at the start of the bull run.

Today, the doctor who manages a kid’s hospital in his hometown Ahmedabad, describes himself as a ‘serious long-term investor who will not be perturbed by intermittent jitters in the market.’

His mantra: Trading make brokers rich, but (long-term) investments make investors rich.

During the recent carnage in January (the Sensex peaked at 21000, then plummeted to 15000), many a panic-stricken retail investor scrambled to sell. 
But Dr Shah bought Rs 5 lakhs worth of blue chip stocks. Some of the investment was funded by borrowed money.

11 months back he took a loan of Rs 6 lakhs to invest in stocks and mutual funds. He did not borrow from friends or take a personal loan, but took a loan on his existing LIC policy. Is this a smart move? We take stock.

Borrow and multiply
“The effective rate of interest works out to 3% when you subtract the actual rate of interest 9% from the 6% I get on my policy. It’s akin to taking a personal loan, except that the rate of interest for PLs can be as high as 23%!” he says.

Post the loan, the amount he pays as premium has not increased, and he will pay the interest on completion of loan maturity.

He used the money to expand his stock kitty and invested in Reliance Industries, Larsen & Toubro, BHEL, Aban Offshore, Educomp Solutions, ICICI Bank, KLG Systel, GMR Infrastructure, IDC, Jindal Steel and Power.

His fund picks comprise Birla Sunlife Frontline Equity, HDFC Top 200, Reliance Growth, DSPL ML India Tiger, Sundaram Select Mid-cap and SBI Magnum Contra.

“I opted for the SIP option. And of course, most policies will mature 12 to 15 years from now,” he says.
 
Mr Market’s folly
Let's find out how the investments have fared so far.

“Warren Buffet says an intelligent investor will always take advantage of Mr Market's folly. I booked my profit periodically during the rise and balanced my portfolio (debt and equity). When the one dollar bill is available at 40 cents I am buying once again,” he says, adding that his envisaged portfolio size will set him ‘financially free’ in 2013.

He describes financial freedom as ‘a well-planned lifestyle where one no longer needs to work for an income to help cover expenses. And debt is not really debt but treated as an expense’.

Risky business?!
All investors please note -- this borrowing strategy comes with a disclaimer.
Dr Shah's recommendation: if you borrow money to invest in equity, you MUST understand the intricacies of the stock market. Or else it could prove to be a risky business.

Reading extensively is a must. Dr Shah swears by two investment bibles: The Intelligent Investor and Buffettology. He reads Outlook Money and Dalal Street Journal, regularly.

“I also swear by Ben Graham (professional investor). And of course moneycontrol.com’s expert columns!” he adds. 

We asked financial trainer and erstwhile stockbroker PV Subramanym, if it’s a good idea to borrow and invest. Here’s what he has to say. 

Continued on page 2